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During the past 20 years, the author has watch China move from being a developing country into an industrial superpower
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Get Four
|  | NOVEMBER 19, 2003
Why Gold's Gleam Isn't Likely to Dim [Page 2 of 2] Q: Besides the price of gold, what's driving these companies' operations? Are they finding new mines? A: What will drive these stocks higher, or particular stocks higher, is to the extent that they can grow production. Unless you're growing production, all you've got, basically, is a play on a commodity. So we think the trick is to identify the quality companies with growth profiles, and that's why I like Glamis. Q: How do you figure out how good their properties are? A: Well, [through] published feasibility studies, and I have a fairly decent idea of what the costs of production are going to be in a given operation. And so you want to focus on those companies that are likely to have costs of productions below $200 an ounce.... That way, if gold falls back, you're still making money. Q: Is that their breakeven mark, their cost of production? A: Well, the average mine out there right now is about $210 to $220 cash cost [the cost to produce an ounce of gold]. That excludes depreciation. So if you can buy companies that can produce below that level, then you're pretty secure. It's unlikely that gold would drop that far down, simply because too many mines would have to shut production. Q: Where is gold right now? How far has it come? A: As we speak [Nov. 10], it is $386.25 [as of Nov. 18, it closed at $398.45]. At yearend, the spot price of gold was $348.05. The beginning of the [gold] bull market was April 1, 2001, [and] the price of gold at that time was about $257 an ounce. The catalyst for the beginning of the bull market was, if you recall, when the Fed started dramatically...to cut interest rates about every month. And that's what got the market rolling, because the gold market, basically, likes low interest rates. Q: And the stock market crashed, too. A: Yeah, the stock market crash definitely helped, because it's negatively correlated with the S&P, no question about it. And then, of course, you had the weakening dollar. So you had a lot of things come together at the same time to get this bull market going. Q: And you think it will continue? A: Yeah, I think so. I think the first ringing of the bell will be when the Fed starts to raise interest rates. That's the first signal that, gee, we better start rethinking the bull-market thesis for gold. But until then, it's pretty much a bull market. Q: Are there any other holdings that you particularly like? Any undervalued stocks? A: If you want a contrarian play, more of a cheaper stock, then I suppose you could look at Barrick Gold (ABX ). That stock has seriously lagged over the last couple of years. Nonetheless...[Barrick has] a very good balance sheet. It has an identifiable growth profile. It's not as good as Glamis, but it's better than most of the other senior producers. The other one I'd rank second or third...is Newmont Mining (NEM ). It probably has the best management in the business. Excellent balance sheet, great assets compared to Barrick.... But, consequently, it's not as cheap a stock. And the growth profile is probably not as good as Barrick's, but it's still pretty good. Q: How should investors look at gold? A: The key thing to remember about gold, and gold-mining stocks in particular, is that they're inversely correlated with the stock market and other financial assets. And, as a consequence, even though gold is inherently volatile itself, its inclusion in a portfolio, at a fairly low level even, will reduce overall portfolio volatility. And hence reduce overall portfolio risk for the investor. It's an effective insurance policy. Q: It probably can't hurt having one gold fund or metal fund in your portfolio. A: Sure. We certainly would. You know, those who even had a 4% commitment to gold, say, two-and-a-half years ago -- even if the rest of their money was in the S&P 500 or whatever -- they at least had something to help cushion that rather brutal experience.
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